The Hindu Business Line : Ranbaxy Labs: Hold

SHAREHOLDERS of Ranbaxy can retain their holdings in the stock. . There has been some choppiness in the trading of the stock, which has shed about 20 per cent over the past month. Though a correction of such magnitude could be perceived as an opportunity to enter into what is admittedly a high-quality generic play in the American market, some caution and wait-and-watch approach are suggested.

This view is underpinned by the pricing pressure seen in the American market in the last quarter of the previous calendar. This spill over into this calendar as well and the pressure on earnings growth could be aggravated by a reduction in other operating income.

In the last quarter of the previous fiscal, Ranbaxy's performance did not quite match the street expectations, with sustainable earnings down 5 per cent at Rs 156.5 crore over the corresponding previous period. This was caused primarily by an 85 per cent increase in R&D expenditure, the write-offs against rofecoxib and anti-retrovirals and the contribution to the pension fund. The significant rise in R&D expense can be attributed to the escalation in the number of abbreviated new drug application (ANDA) filings the last quarter; as against seven filings in the first nine months of CY04, 19 were made in the last quarter. Ranbaxy has some 50 applications pending approval with the US Food and Drug Administration, and, as such, has probably the best pipeline of products targeting the generic market.

For the moment, the spotlight is trained on the ongoing litigation between Ranbaxy and Pfizer on patents surrounding the latter's Lipitor, the world's top selling multi-billion dollar blockbuster formulation used to treat heart disease . Should the verdict favour Ranbaxy, it would offer upside potential of a staggering magnitude and push Ranbaxy's earnings profile into a different trajectory. A US District Court ruling on the issue is expected by the middle of this year; of course, the losing party is certain to appeal to a higher court.

With Ranbaxy stating that it would launch the drug only after the final appeal is resolved, it could probably put the product in the market towards the end-2006/early-2007, if successful. Though it would not be possible to hazard a guess on the nature of outcome of the litigation, news flow surrounding this product should keep the buzz on the stock alive.

Ranbaxy's robust pipeline, as also its diversified geographical presence, serves as a natural hedge against any significant price erosion on some of its key products in the American market. However, with the US being its key market, the escalating price competition could weigh down on earnings. .

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Value inflow sans cash outflow

Indian firms continue to destroy value

Ambuja Cement India: A cash cow

HDFC Growth: Hold

SBI Magnum Equity: Switch

In line with time profile

HSBC to launch Dynamic Midcap fund

Mastek: Keep it on hold

Gujarat Ambuja Cement: Buy

Hero Honda: Sell and re-enter at lower levels

Ranbaxy Labs: Hold